The Canadian dollar has lost ground in the Monday session, erasing the gains seen on Friday. Currently, USD/CAD is trading at 1.2873, up 0.34% on the day. In Canada, the focus is on inflation data. The Raw Materials Price Index is expected to rebound with a gain of 0.6%, while the Industrial Product Price Index is forecast to edge higher to 0.2%. In the US, Personal Spending is predicted to improve to 0.4%, while the markets are braced for Pending Homes to slip by 0.6%. On Tuesday, Canada releases GDP and BoC Governor speaks at an event in Yellowknife. In the US, the main event is ISM Manufacturing PMI.
The US released the first GDP report for the first quarter, with a respectable gain of 2.3% which beat the estimate of 2.0 percent. Still, this was a significant drop from GDP in the fourth quarter of 2018, which came in at 2.8 percent. Analysts also took note of the Employment Cost Index, which rose from 0.6% to 0.8%, another indication that inflation is moving higher. There is growing sentiment that the Federal Reserve will raise interest rates four times this year, although Fed policymakers continue to project a total of three increases in 2018. One scenario envisions the Fed raising rates once each quarter until the economy shows signs of slowing down. If inflation continues to move higher and economic conditions remain strong, the US dollar could continue to make headway against its Canadian counterpart.
Bank of Canada Governor Stephen Poloz testified on Parliament Hill last week and delivered a message of cautious optimism about economic conditions. Poloz said that he expected the economy to improve after a disappointing first quarter and projected that inflation would push above BoC’s target of 2% later in 2018. The bank maintained the benchmark rate at 1.25% at its April meeting but is expected to raise rates as early as May. However, policymakers would prefer to see the NAFTA negotiations concluded before making any rate moves. The talks have made significant progress, but the critical auto pact remains a stumbling block. It is likely that a tentative agreement will be hammered out, perhaps as early as May.
